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Is extreme remodeling a charitable contribution?

July 23, 2010

Sometimes remodeling just isn't enough. To get the house of your dreams, it may be easier to just level the house and start over. It's not arson if you let the local fire department burn down the house for practice -- but is it a charitable deduction?

It isn't for an Ohio man. James and Lori Hendrix worked out a deal with his local fire department to let them fire up the old house, clearing the way for a new one. While their tax advisor didn't tell them they would get a deduction, they gave it a shot anyway, deducting what they believed to be the fair value of the house as a charitable contribution to the fire department.

Now it's not clear that they could have gotten a deduction for having the local fire department do the "tear-down" under the best of circumstances -- as this TaxProf Blog post shows, the issue is not settled. But these weren't the best of circumstances. The taxpayer blew any chance at a deduction by failing to properly document the donation on their tax return.

The tax law has a list of formalistic requirements you must follow to deduct a donation of property valued at more than $5,000. These include, among other things, a "qualified appraisal" and a properly-completed Form 8283. The Ohioans tripped up here, according to the district court opinion:

...the appraisal submitted by Plaintiffs does not contain the expected date of contribution, the terms of the agreement between Plaintiffs and the city, the qualification of Plaintiffs' appraiser (including Ann Ciardelli's background, experience, education, and any membership in professional appraisal associations), and the required statement that the appraisal was prepared for income tax purposes. Defendant's [the IRS] evaluation of the appraisal's deficiencies is accurate. See Doc. # 23-4. In fact, in addition to failing to contain any of the identified, specifically required information, one provision of the appraisal arguably disavows by omission that the appraisal was prepared for income tax purposes.

The taxpayer asked the judge to allow the deduction anyway under the doctrine of "substantial compliance." No luck:

Assuming arguendo that the doctrine indeed could apply in such taxpayer actions, the Court finds that the appraisal at issue wholly lacks even a modicum of content in critical areas to say that it substantially complies with numerous statutory and regulation mandates. The substantial compliance doctrine is not a substitute for missing entire categories of content; rather, it is at most a means of accepting a nearly complete effort that has simply fallen short in regard to minor procedural errors or relatively unimportant clerical oversights.

The IRS isn't crazy about charitable deductions for authorized arson, but the taxpayers made it easy for them here. Whenever you donate appreciated property (other than publicly-traded securities) to charity, be sure to follow the IRS property donation rules carefully. Burning your house may or may not be a good idea, but letting a deduction go up in smoke is always a tragedy.

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» Torched home not allowable deduction from Don't Mess With Taxes
A federal court in Ohio has extinguished the charitable tax deduction hopes of an Ohio couple who donated their home to their local fire department so it could be burned as part of a training exercise. The problem in this case was not the controlled ar... [Read More]